The transformation of firms and especially Small and Medium Enterprises (SMEs) which have little autonomous capacity is a function of growth oriented policies. Lacking a very rapid growth in the market sufficient to overcome disguised unemployment, the transformation of these industries has been affected. The continuation of tariff inversion, high and uncompensated energy taxes hurt manufacturing and especially the small and medium sector whose dependence on relative factor cost is high. The slow movement towards de-reservation has further attenuated the process. Without these corrections the move to have “free-trade” agreements with the ASEAN (Association of Southeast Asian Nations) countries would hurt manufacturing in India and especially the SMEs. Many of the traditional small firms are in clusters, and a cluster oriented approach would be important for their success. A strategy based on leveraging trade names/brand names, many of which could be argued to be "geographic indicators", with much equity worldwide, would require immediate changes in our Intellectual Property Rights (IPR) regime. Costs of excise registration and dealing with excise authorities are too large, and there is a fixed component to this cost which cannot be spread over a large value of turnover. Only significantly lower excise rates for small firms could compensate them sufficiently. The criteria of "with and without the use of power" in the Factories Act can be entirely dispensed with. Credit is the single most important constraint for small firms. Incentivisation of priority sector targets is the solution. The policy of directed lending to small firms ought to shift from targets or quotas to incentives to banks for lending to small firms. Tax based incentives for banks and financial intermediaries are also possible. Concessions on interest rates are dysfunctional, though the margin above PLR rates ought to be subject to a ceiling. State Finance Corporations which could play a crucial role in financing of SMEs would have to go through quick restructuring and refocus on promotion of new enterprises. For all small firms power and water continue to remain constraints even after nearly 10 years of reform. These can easily come down at least for export industries if the taxes and cross subsidies on them are made vattable. Despite the Electricity Act 2003, open-access has not been extended to SMEs. Technology based and skill labour using industries such as IT, BT, pharmaceuticals and auto oriented industries, also need to be exploited.

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